Expectations that the European Central Bank and the Bank of England will cut interest rates sharply this week after Australia did so on Tuesday also lifted sentiment ahead of the U.S. Presidential vote.

The FTSEurofirst 300 index of top European shares closed 4.3 percent higher at 974.15 points, though the benchmark index is still down about 35 percent this year.

Banking shares also moved higher, with investors hoping that the credit markets would get a new lease of life after recent coordinated measures by the governments and expectations of further rates cuts in Europe this week.

'The European banking sector will be keenly watched, as they have been hard hit, which would suggest that any recovery in the economy will impact positively on the sector,' Chris Hossain, senior sales manager at ODL Securities, said.

'The European banks have been offered olive branches by the various governments, and it is encouraging to see that banks are swallowing their pride and going cap in hand and asking for funds,' he added.

Investors kept a close eye on the U.S. presidential election, as the result may offer some relief with the prospect of more fiscal stimulus.

Democrat Barack Obama and Republican John McCain faced the verdict of U.S. voters after a long and bitter struggle for the White House, with Obama holding a decisive edge in national opinion polls.

Despite the rally in key European banking stocks, the sector's troubles continued to force governments to take bold measures.

European Union leaders pressed for an overhaul of global market rules. EU finance ministers, meeting in Brussels, backed proposals from the bloc's French presidency for reforming oversight of global capital markets.

Australia's central bank became the latest to cut interest rates, boosting expectations that central banks in the euro zone and Britain which meet later this week would also aggressively lower the cost of borrowing.

'We see it happening all around the globe. We had the U.S., Japan and now Australia, and we will have cuts in (the UK) and the euro zone,' said Bernd Meyer, head of pan-European equity strategy at Deutsche Bank in London.

UBS, one of Europe's hardest-hit banks, said a government bailout was helping to stem client money outflows but warned it could take a 6 billion Swiss franc ($5.20 billion) hit in the fourth quarter due to accounting effects.

UBS shares were up nearly 4 percent. Royal Bank of Scotland closed flat after slipping over 9 percent.

The bank, which is taking 20 billion pounds of emergency UK government funds, reported a smaller-than-expected writedown of 206 million pounds on toxic assets in the third quarter but said bad debts were rising sharply.

Germany's BMW abandoned its 2008 earnings forecast and cut production after a 60-percent plunge in quarterly profit.